How Should You Really Pay Off a Credit Card?

Mount Everest

If your credit card debt feels like Mount Everest, it’s time to take action | KAZUHIRO NOGI/AFP/Getty Images

You used a credit card to cover extra expenses in college, and now that debt has ballooned — and you’ve got three other cards with balances, too. You used credit to cover expensive medical bills in your family. Or, you signed up for five cards with great rewards programs, but you haven’t been able to keep up with the payments, and the rewards certainly aren’t paying for themselves. Whatever situation got you here, you’re now staring at a mountain of credit card debt, and you’re not sure how to shovel out.

From April to June of 2016, American consumers racked up $34.4 billion dollars in credit card debt, adding to the staggering amounts that have already accumulated, according to a recent WalletHub analysis. Both WalletHub and MarketWatch predict that total credit card debt nationwide could reach $1 trillion by the end of the year — a figure not seen before in American history. Spread across all Americans, the average household debt works out to about $5,700. But when you count only those people who carry a credit card balance, the average debt rises to an estimated $16,048.

The hardest step is choosing to tackle your credit card debt head-on. After that, it’s all about choosing the best repayment method. There are two main strategies for credit card repayment; what experts call the avalanche and snowball methods. (Your mountain of debt is evidently covered in snow.) We talked with Matt Schulz, senior industry analyst for CreditCards.com, to find out the main pros and cons of each strategy.

Debt repayment basics

Man calculates money on calculator along with piggy bank

Calculating income | iStock.com

Before you even begin to choose a repayment method, there are some basics to keep in mind. First, if you haven’t already created a budget for yourself, now is the time to do it. Keep in mind that this will be a learning process, but coming up with a repayment method as you build a budget will help you to avoid getting into a similar situation down the road. The best way to handle credit cards is to never carry a balance, but to accomplish that you need to have the money in the bank in order to pay the bills that come due each month. Tracking your monthly spending, and coming up with a balanced budget based on your income and expenses, will be vital.

Having a budget will also show you where you can cut extra spending while you buckle down and attack your debt. Once you have an idea of how much you can afford to set aside for credit card payments each month, you’ll be able to make a more informed decision about your strategy.

Regardless of which method you end up choosing, most experts agree that it’s a good idea to have a “focus debt.” You’ll make the minimum payments on all your cards — to avoid charge-offs, delinquencies, and other nasty consequences. The extra money you’ve set aside for credit repayments will go to one specific card balance, but choosing which balance will depend upon which method you use.

The avalanche method

avalanche

Avalanche | FABRICE COFFRINI/AFP/Getty Images

The avalanche method suggests that your extra money for repayments go toward the balance with the highest interest payment first. You’ll be able to find those interest rates easily on each credit card statement, but these can often include store credit cards, secured credit cards, or cards you obtained with a “fair” credit score.

The idea behind the avalanche method is that you’re targeting the debt that has the potential to grow the fastest, and nipping it before it has the chance to get out of control. If you’re motivated by paying as little as possible to your creditors, this might be the plan for you, Schulz said. “If you pay that first, you end up probably paying less total in the long run,” he said. 

Mathematically, the avalanche method makes the most sense. At this point you might be counting every penny to get out of the red, and knowing that you’re saving yourself potentially thousands of dollars in interest can be incredibly gratifying. However, the downside is that those highest interest payments might also have the highest balances. If that’s the case, it could take several months to start to see a significant different in your debt balance.

“It may require a little bit more patience to see major results,” Schulz explained. “If you have 5 cards and you’re attacking the one with the biggest debt, a few months in, you may still have all of those cards with those balances.” Your debt load will be coming down — likely in significant ways — but it can be difficult to see it right away. If you’re the instant gratification type, this can be a tough pill to swallow. 

The snowball method

boy rolling a snowball

Snowball | China Photos/Getty Images

If you’re driven solely by numbers, the avalanche method might be all you need. But for others who need to be motivated by seeing progress from the outset, the snowball method might be a better alternative. In this case, when you have multiple cards with balances, you focus on the ones with the smallest balances first. The idea is that you build from a small start to tackle the largest ones later — similar to how a snowball starts small in those Saturday morning cartoons, and eventually picks up momentum (and size) as it rolls down the hill.

“What you’re doing there is building momentum for yourself through those small victories,” Schulz said. “If you’re able to go from having five cards with credit card debt to three, that can be very motivating and inspire you to work to pay off those debts.” By the time you hit the larger ones, you’ll have several victories under your belt — and likely be in the habit of repaying them. 

Of course, you might end up paying more in interest over the long run, since your smallest balances might not necessarily be the ones with the largest interest rates. However, that’s not a factor as much as the psychological boost. “By shedding some of those lower balance credit cards, it can really fire you up to keep going,” Schulz explained. 

One study, published in the Journal of Marketing Research, backs up this idea. “The increased motivational benefits of small victories may make it beneficial to pay off debts from smallest to largest in some cases, ignoring interest rates,” the study authors concluded. This won’t be beneficial in all cases, depending on interest rates, but can be a valid method if you’re worried about lacking motivation to stick with your plan.

Which method is best?

woman holding credit cards

Woman holding credit cards | Joe Raedle/Getty Images

Paying off sizable amounts of credit card debt will take time, no matter which method you use. For example, one repayment calculator on Bankrate shows that if you have $5,000 in debt on one card, with an 18.16% interest rate (the average rate for card-holders with “good” credit), it will take monthly payments of $458.78 on that card alone to pay it off in a year. You might have that type of extra money, but more than likely that’s not feasible with your other card payments.

Alternatively, if you’re able to pay $300 a month on that card, it will take you approximately 20 months — or over a year and a half — to pay off that one card. If you’re using the avalanche method, you’re likely saving money on interest by not dragging out those payments, and allowing the interest to compound. On the other hand, that means it’ll be almost two years until you can target another bill. If you’re using the snowball method, you’ve likely saved this bad boy for one of your last targets, and have built momentum along the way. However, your interest has likely grown, and you owe more on it than you otherwise would have.

Schulz said when he was paying off his own credit card debt several years ago, the avalanche method made the most mathematical sense to him. However, he understands the motivation that the snowball method can offer. The specific method isn’t as important as choosing one and sticking to it.

“Ultimately, it doesn’t necessarily matter which of these plans you pick,” Schulz said. “What it all comes down to is that you need to do something. Just the fact that you are beginning to attack that debt and that you stay with it is the important thing.”

As the blog MoneyUnder30 shows, either method might cost you a similar amount, over the same amount of time. In addition, you don’t have to stick rigidly to one plan. If you start with the snowball method but use your motivation to move to a higher balance next, that’s fine. As long as you’re able to stick with a plan you create and set aside that money for payments each month, you’re succeeding. “Ultimately, it’s about finding what works for you,” Schulz said. “If it’s some sort of combination of the two or some other different way of doing things, that’s what you should do.”

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